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April 2019

SCOTUS Expands Limitations on Class Arbitration

In a sure win for employers across the Nation, on April 24, 2019, the U.S. Supreme Court held—in a 5-4 conservative majority decision—that absent explicit agreement, class claims cannot be pursued in arbitration. This ruling expands employers’ ability to avoid defending against class claims, and the significant associated costs, by limiting the scope of arbitration to non-class claims where the underlying agreement is silent or ambiguous as to the availability of class arbitration.

In Lamps Plus v. Varela, 2019 U.S. Lexis 2943, the U.S. Supreme Court reversed the Ninth Circuit’s affirmation of a lower court order compelling class-wide arbitration.  The facts of this case derive from a 2016 hacking incident, whereby a hacker was able to surreptitiously obtain the tax information of approximately 1,300 employees of Lamps Plus, Inc., a retailer of light fixtures and related products. Once this came to light, employee Frank Varela—who executed an arbitration agreement that was ambiguous as to class arbitration—filed a putative class action, asserting claims on behalf of himself and all other Lamps Plus employees whose information had been compromised. Lamps Plus moved to compel the lawsuit to arbitration on an individual basis. Although the District Court ultimately ordered the matter to arbitration, it did so on a class-wide basis. Lamps Plus appealed, but the Ninth Circuit affirmed the lower court’s ruling.  Finding the subject arbitration agreement to be ambiguous on the issue of class claims, the Ninth Circuit relied on California contract law in determining that any ambiguities must be construed against the drafter (Lamps Plus), and thus adopted Varela’s interpretation authorizing class arbitration. Lamps Plus then petitioned to the Supreme Court, which agreed to hear the case.

In reversing, the Supreme Court found the Ninth Circuit’s ruling to be contrary to not only the Federal Arbitration Act (“FAA”) and overall objectives of private dispute resolution in general—i.e., to promote lower costs, greater efficiency and speed, etc.—but also precedent that courts may not infer consent to participate in class arbitration absent an affirmative contractual basis for concluding the parties actually agreed to do so. Regarding the former, the Court noted that the primary benefits of arbitration are largely sacrificed in a class arbitration, making the process slower, costlier, and riskier for all parties involved. With respect to the latter, it found that neither silence nor ambiguity can provide a sufficient contractual basis for concluding that parties to an arbitration agreement agreed to sacrifice the principal advantages of arbitration, which are otherwise diminished through class-wide application.  Accordingly, the Supreme Court concluded that courts may not infer from an ambiguous agreement that parties have consented to arbitrate on a class-wide basis.

What This Means for Employers

Employers can require employees to submit to binding arbitration by having them sign an arbitration agreement as a condition of employment (either upon hiring or during employment).  Such arbitration agreements can include class waivers, precluding pursuit of class claims in arbitration.  Absent the inclusion of such class waiver, plaintiff employees have typically relied on contract law in arguing, with mixed results, that such ambiguous arbitration agreements should be interpreted against the drafter (typically, employers), and thus in favor of class arbitration.  Lamps Plus appears to settle the question in favor of employers. 

With a well-drafted arbitration agreement, employers can essentially avoid employee class action claims by requiring employees to pursue any disputes through binding arbitration, while at the same time prohibiting them from asserting class claims. Accordingly, we suggest that employers have all applicants and employees sign arbitration agreements, which should include class waivers just to be safe. If for any reason such a class waiver is not included, we suggest making clear in the agreement that it is governed by the federal FAA, so as to preserve the right to assert preemption against potentially conflicting state laws. This may prove to be important, because the Supreme Court’s ruling concerned an arbitration agreement governed solely by the FAA and plaintiffs may argue for a different result regarding agreements governed by state law.  Additionally, employers in California should be mindful that representative claims under California’s Private Attorneys’ General Act of 2004 (“PAGA”)—which allows plaintiffs to seek certain civil penalties (but not damages) for wage and hour violations on behalf of all other similarly aggrieved employees—cannot be waived.  Of course, there are a number of other requirements that must be complied with in order to ensure that arbitration agreements are fully enforceable and not unconscionable, which is outside the scope of this article.

Please contact Gordon Rees Scully Mansukhani, LLP employment attorneys with questions regarding arbitration agreements.

Employment Law

Joshua B. Wagner

Employment Law